Uber-fication: Lessons from Uber in Economics, Digital, Risk, and Analytics

22 Nov , 2015

With the continued growth of Uber in many markets, it is worth considering what Uber has done that drives such success and why so many businesses are seeking an Uberization or Uber-fication solution to their business. Below is a listing of lessons on what to do if you are seeking to Uber-ize your business model.

Offer Transparency in Operations and Reduction of Transaction Costs

The Noble-prize winning economist, Ronald Coase, points out in his famous work The Nature of the Firm (1937) that firms will continue to grow in size when they 1) reduce transactional costs and 2) entrepreneurs are less likely to make mistakes given the operations of the firm. These are profound points that underscore Uber’s model. Previous to Uber, taxi cab drivers would wait around hotels and popular sites for riders. That is a really high transaction cost. In Chicago alone, cab divers tell me they might wait 1-2 hours for a fare of uncertain value. This brings us to the second point raise by Professor Coase – Uber makes it easier for the driver to make a sound economic decision. It fact, risk is reduced by providing the driver information on the destination and fare. Waiting at a hotel for a ride is a gamble that might result in a big fare to the airport or an unworthy fare across town. So, given these points, it comes as little surprise that Uber has grown so quickly and to such a large size, as it has met both of these conditions. We have seen similar successes in eBay, Amazon, and Apple Itunes.

Key point: If you want to grow a business, reduce costs to transact and make the operations transparent so that business partners find it less risky to participate with you.

Become Digital and Become Mobile

The leading digital platform of our day is clearly mobile. The convenience offered by the Uber app in summoning a car is unmatched. There is no need to look up local taxicab firm or to tip a bellman for a ride. You are just one click away from a well-understood, high quality customer experience. I think that many firms see their uberization as tied to this digital aspect only and might not consider the previous point of transaction costs or the ones below. Being accessible on an app is critical, though. The recent partnership of Google Express and Costco shows how shopping and the needed delivery can be conducted and scheduled via an app and borrow from the best of Uber. It is clear that busy professionals and more digitally-connected generations trust and prefer such business models. Interestingly, if we assign costs to shopping, then Professor Coase’s ideas are relevant when evaluating mobile apps. After many trips to Costco for sundries and basic goods, I realized that I had invested many hours in the work of collecting items off of their shelves and putting them on my shelves. That was a transaction cost – which I fully bore. If you value your time more intensively or do not have an SUV to take to Costco (and must rent one or experience some other transportation costs), then shopping at Costco has great transactional cost. The digital app model to have your goods delivered to your house, available on phone is not just convenient, but it also reduces transaction costs.

Key point: So, the lesson here is move your business to a digitally-driven model, and leverage mobile systems to reduce or eliminate the time in transacting and the work in finding and buying your product or service.

Share Marketplace Data Openly

Uber’s solution overcame another economic hurdle that is honored with a Nobel Prize (awarded to Akerlof, Spence, and Stiglitz in 2001). By openly sharing information about the quality of drivers, types of routes, reviews of drivers, and prices for routes, Uber broke down the asymmetry of information that was at work in the car and taxi business. Both drivers and riders had access to the same pricing and route information. In general, this open sharing of information has been at the core of most Internet sites and growth in sites like Amazon, eBay, Kayak, and Zillow show that sharing information is important in attracting both buyers and sellers. Sharing data is a basis of forming a marketplace. Uber is a marketplace, and if you want to be a marketplace, share data about your products, services, and business partners.

Key point: Share information about your products, business partners, and services. If don’t share it, then Yelp, Amazon, eBay or some other site will do it for you and become the preferred marketplace for your product and then control your pricing!

Leverage Data and Analytics to Make Rational Decisions and Drive Policy

Although few riders faced with a surge pricing notification from Uber are elated, the explanation is offered and is rationally driven by acute supply and demand conditions. Behind the senses, Uber has deployed algorithms that examine market conditions and raise or lower prices to drive a match in supply and demand. With surge or differential pricing, if you want ride now, you can have it – albeit at a higher price. Such analysis allows customers to prioritize their consumption of the product. Can you wait an hour for more drivers to arrive? If so, you trade time for cost savings. If not, you have an option. At least it is a better option than no drivers available at all.

It would be great to have such a service in appliance repair. If you have ever scheduled an appliance repair, you have probably been shocked to hear that the next opening is a week later or the like. The appliance repair business is an example of a market that is either highly supply limited or one that should allocate some supply for acute emergencies or re-pricing for customers willing to pay more for quicker service. At a certain level, differential pricing might be discordant with the American democratic notion of equality, but when combined with the necessary information such that a customer has the choice or freedom to choose, the model is much more acceptable. This is critical. If a business just decides to raise prices on Tuesday and lower them on Friday with little explanation on why or without rational analysis, then decision looks capricious, unpredictable, unfair, and untrustworthy. I have had exactly such thoughts when I have seen airline tickets wildly swing in price, yet I see no information on yield or number of seats sold. Uber offers differential pricing along with perquisite analysis and explanation of that differential pricing.

Key point: Leverage data collected about the customer to make rational offerings to the customer. Tell the customer why they have received such offers and what benefit they are afforded. Use analytics to systematically and rationally carry out these offers.

Professor Walker has provided these talks and programs to leading firms and governmental organizations. Click here to learn more about his talks, references from clients, options for customized talks and programs, and details on scheduling a program for your organization.

About Russell Walker, Ph.D.

Professor Russell Walker helps companies develop strategies to manage risk and harness value through analytics and Big Data. He is Clinical Associate Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management of Northwestern University.

By Russell Walker, Ph.D.
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Russell Walker helps companies develop strategies to manage Risk and harness value through Analytics and Big Data. As Clinical Professor at the Kellogg School of Management of Northwestern University, Russell Walker has developed and taught leading executive programs on Big Data and Analytics, Strategic Data-Driven Marketing, Enterprise Risk, Operational Risk, and Global Leadership.
He founded and teaches the popular Analytical Consulting Lab and Risk Lab, experiential classes, which bring Kellogg MBAs together with real-world projects in Analytics and risk evaluation.
His is the author of the book From Big Data to Big Profits: Success with Data and Analytics (Oxford University Press, 2015) which examines data monetization strategies and the development of data-centric business models in the new digital economy. He is also the author of the award-winning text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management as a competitive advantage.
Dr. Walker consults with firms on the topics of Big Data and Analytics, Risk Management, and International Business Strategy.
Russell Walker can be reached at:
russell-walker@kellogg.northwestern.edu
@RussWalker1492
russellwalkerphd.com

Welcome to Big Data to Big Profits

As Clinical Professor at the Kellogg School of Management of Northwestern University, and former Associate Director of the Zell Center for Risk Research, Russell Walker has developed and taught leading executive programs on Big Data and Analytics, Strategic Data-Driven Marketing, Enterprise Risk, Operational Risk, and Global Leadership.

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Welcome to Big Data to Big Profits

Russell Walker helps companies develop strategies to manage Risk and harness value through Analytics and Big Data.
As Clinical Professor at the Kellogg School of Management of Northwestern University, and former Associate Director of the Zell Center for Risk Research, Russell Walker has developed and taught leading executive programs on Big Data and Analytics, Strategic Data-Driven Marketing, Enterprise Risk, Operational Risk, and Global Leadership.